Divorced and deceased in Arizona, will the survivor be chased down by creditors?

As promised, on to more Reader questions:

Bernie wrote:

My daughter is divorced (2009) and lives in Scottsdale, AZ. On June 18, 2010 her ex-husband, who lived in Mesa, AZ, died suddenly and unexpectedly from a heart attack at age 50. She is now seeking guidance with respect to the fiscal ramifications of the death, in particular how to avoid inheriting her ex-husband’s debts.

My daughter’s ex-husband has a considerable amount of credit card debt. (est. $35,000) and has no assets other than an automobile that is valued at less than $3000. Her ex-spouse at the time of death was unemployed and has been for most of the past three years. It is likely that he wasn’t making anymonthly payments to creditors for at least the past year.

My daughter has approximately $20,000 in credit card debt and she owes approximately $15,000 on an automobile loan. She has always made regular, on-time payments on credit card accounts and the car loan, and her credit rating is excellent. Her only financial asset is money that is in her teacher retirement account; she doesn’t own any property. My daughter has been steadily employed since graduating from college in 1992 and she currently works as a XXXXX in Arizona, earning approximately a gross of $50,000 per annum.

My daughter was married in Massachusetts in 1998 and moved to Arizona in 2005 so that her ex-husband could find employment. From 2005 to 2007 her ex-husband was employed selling appliances, mainly to home builders. He lost his job three years ago as a result of the slowdown in the housing market.

My daughter and her ex-husband have maintained separate credit card accounts since before they were married in 1992. That is, her name has never appeared on any of his accounts and his name was never on any of her accounts.

In 2008 my daughter and her husband agreed to separate and their divorced was final in 2009. In the divorce decree they mutually agreed to an equal disposition of personal assets and assumption of full responsibility for debts that were in their respective names; meaning each took responsibility for credit card debt in their name.

Community Property — We are aware that Arizona is a community property state; we understand what that means, and consequently we are very concerned about how the community property designation complicates matters. In addition, we also understand that the level of joint liability for new debt ceased with the divorce.

The big question is, how can my daughter be protected from her ex-husband’s potential creditors?
My daughter’s ex-husband did not have a will. The funeral arrangements and the dissolution of personal items is being been handled by the deceased brother who resides in Massachusetts. The brother is also going to notify all creditors of the death.

It is unclear what protections my daughter might enjoy and how to respond in the event she is chased down by her ex-husband’s creditors. We are looking for guidance and possibly legal assistance to protect my daughter’s resources. Can you please give me a preliminary prognosis, or let me know if you need additional information before you can offer an opinion?

Bernie, thanks for your question. The fact is, it’s a stretch for me to believe that creditors would come after your daughter for his past personal debts. The potential litigation costs and possibilty that the creditor wouldn’t collect are too high in my opinion to believe that they would try and chase your daughter down for his personal credit defaults.  That doesn’t mean they won’t however. In the event they do, then I would retain an attorney in Arizona to help, but until then, in my opinion, you’re simply wasting money on retainer that you likely won’t need or use. I hope this helps!

Effect on personal taxation of gold transactions to businesses that buy/sell gold?

I apologize for not posting in some while – I took a much needed vacation to the West Coast and enjoyed my time out in the So Cal area thoroughly. While I was gone I received a couple of reader questions which I will answer over the next couple of days, and then I will get back to personal finance basics as promised. Check out my most recent reader question from Mary.

Dear Finance Dad;
In 2004, I rolled over part of a retirement annuity into Palladium. The initial investment was $50,000. In December 2007, I rolled over approx. $83,000 total of the Palladium acct into Gold Coin. Unfortunately for me, the transaction was completed in February of 2008, when the cost of gold was at a peak that year (but Palladium was also rising). Initially I was dusted a bit on that transaction, but it is now slowly increasing and as of June 30 of this year the value is now $94,900. This investment represented half of my total retirement accounts (the initial amount into palladium). I feel it has done very well. I am close to the end of my work years, having worked 40 years at this point.

My question to you is, what do you feel the effect of the Obamacare clause re: taxation on gold transactions to businesses that buy/sell gold will affect me? I am surely feeling the bottom line of the food chain (moi), will probably be nailed on any transactions that I will be making out of that gold IRA. Would it be adviseable to close out the account prior to the initiation of the taxation law, and simply roll over the money?

I hope this made sense. 50% of my total life retirement was invested into the initial palladium IRA, and although it was a good move, I am beginning to panic.

Please advise.

Thank you in advance.

Sincerely,

Mary

First off, thanks for your question Mary, I will try and address it and some other concerns I have after reading your story. But please keep in mind, I’m only providing my opinion on this matter, and that doesn’t mean it’s right for you. I’m going off of very limited information and my answer should only be taken as one man’s opinion and nothing more. You should seek professional advice from a certified financial planner or similar.

For some background on what Mary is talking about:

According to an ABC news report, the new 1099 provisions in the health care bill, which will force business owners to declare all purchases over $600 on their yearly tax return, will also directly affect the sale of gold coins and bullion:

Section 9006 of the Patient Protection and Affordable Care Act will amend the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals.

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.

So every time a member of the public sells more than $600 worth of gold to a dealer, Piret said, the transaction will have to be reported to the government by the buyer.

The new legislation works in both directions to track the buying and selling of gold.

Essentially, any transaction over $600 will be logged buy the dealer, whether you buy $600 or more worth of gold, or sell it back to the dealer.

The article then proceeds to give some reasons to be concerned beyond the possibilty of taxation.

Since the transaction will require a social security number (or federal employer identification number) to be logged at the time of sale or purchase, this new legislation gives the government the capability to track every single precious metals purchase (over $600)  in the country.

While the legislation implies that taxation of such transactions to generate additional revenue is the goal, precious metals buyers, who generally like to remain anonymous, will most certainly see that the real issue in this instance is not taxation, but the ability to track who owns the gold.

When the US government ran into money problems in the 1930’s, Franklin Roosevelt confiscated all gold held in the hands of the public, and those who refused to give up their gold were either fined or imprisoned. Incidentally, the communists in Russia and eastern Europe did the same thing throughout the 20th century, but those penalties went a bit further than just imprisonment.

With a US dollar currency crisis and a US federal government debt crisis looming, many precious metals investors are concerned that similar government action may be instituted in the future.

Though it has been argued by many that confiscation in the US would not be necessary or feasible, the 1099 legislation certainly makes it easier to identify who has the gold.

Of course, those who purchase prior to January 1, 2012 will be “off the books,” until that time when they attempt to sell their gold to a registered dealer who will be required to log the transaction.

There’s a reason economist Marc Faber advised clients that they should hold their gold outside of the US.

Historically, when the economic or political shit hits the fan, governments have always moved to seize precious metals from the citizenry. The Nazis did it in World War II. The US did it in the 1930’s. The Bolsheviks did it in 1917. Rome did it by removing 90% of the silver from their coinage.

It is conceivable that, because of global economic problems, governments like the US, China and EU may once again make a move to “repatriate” the gold belonging to their citizens. Even if this is avoided, the tracking capabilities that have been provided for in the Obama health care legislation now give the government the ability to know exactly who buys how much gold, as well as an easy tracking mechanism for taxing the transaction. Rather than confiscating your gold, they may simply tax your profits at 95% at the point of sale, virtually wiping out the very reasons for why an investor buys precious metals to begin with.

This is why we advocate a diversified strategy for gold investing and wealth preservation that includes not only the acquisition of bullion here at home, but if you have the capability, international storage of physical metals (i.e. Singapore, Australia via Perth Mint, Hong Kong, South America, etc.). Though you may lose some gold in the event of a confiscation or extreme taxation in one country, you may be able to retain some wealth internationally. We also recommend looking into the purchase of gold equity ETF’s like the Market Vectors Gold Miners (not commodity ETF’s like GLD) that give you direct shares of some of the top gold companies in the world.

And of course, for those without the ability to invest internationally, buy off the books while you still can and keep your gold out of sight of potentially prying eyes. Once the $600 reporting period begins, be sure to change dealers regularly, as the $600 is a yearly accrual based on the social security number or federal EIN.  The other option after January 1, 2012, of course, is to keep your purchases and sales under $600. This can be achieved with fractional gold coins (though the price of gold may rise significantly taking these above the $600 threshold as well) or one ounce silver coins which trade for significantly less than gold.

By Mac Slavo
http://www.shtfplan.com/

Mac Slavo is a small business owner and independent investor focusing on global strategies to protect, preserve and increase wealth during times of economic distress and uncertainty. To read our commentary, news reports and strategies, please visit www.SHTFplan.com

While I think the above article gives Mary reason to be concerned, I would argue that this new law is the least of her concerns. The fact is, her portfolio being 50% invested in gold scares the heck out of me at her implied age. If I’m guessing correctly, Mary is probably in her late 50′s or early 60′s, and she’s taking way too much risk for her age. At this point in life Mary should be concerned with asset preservation versus wealth accumulation.

Precious metals are far too volatile to have half of your nest egg in when you’re nearing retirement. I would agree with this article in saying that I wouldn’t have more than 5-10% of my portfolio tied up in precious metals. The fact is, if I were just a few years away from retirement, I would have certainly less than 5% of my portfolio invested in gold and other precious metals. Having said that, Mary, get out of those risky investments and look at transitioning your portfolio over to more bonds (specifically TIPS), where the risk is much lower, but the reward is being able to keep the money you’ve accumulated. I’m not sure what the other 50% of Mary’s portfolio is invested in, but it certainly couldn’t be diversified enough to outweigh the risk of the other half of her portfolio.

I hope this helps Mary!

How to use my 401k Retirement Calculator

A reader Paul recently asked me, “I struggle with your 401k calculator. I am trying to determine how much I need in my 401k before I can retire, and how much I should be putting in to my 401k before I retire to achieve that amount. Your spreadsheet columns don’t seem to give that info. What am I missing?”

(You can find my online retirement calculator here.)

First off Paul, you’re  correct, this calculator only tells you what you will need to save in total to achieve your retirement objectives. You will have to take that total amount and work backwards to determine how much you will need to be saving every paycheck to meet those goals. Moreover, you will have to determine if your goal is even realistic.

It’s easier if I give you an example.

Let’s say Paul is currently 30 years old and makes about $100,000 per year. Let’s say Paul wants to have the same income level in retirement as he does now (even though he will have his home paid off, he wants to use the extra money for traveling the world), see below for the assumptions used.

Now, after you’ve adjusted the assumptions and pressed the button to calculate, you will see results as shown below.

The above highlighted numbers represent the amount of money in today’s dollars that you will need to have accumulated by the time you retire.

You have to take this one step further to determine how much every month you will need to sock away to meet that goal, by using a future value calculator. Let’s say Paul’s goal was the $4,501,728 above . I found this nifty future value calculator to help determine how much he would need to put away each month. I simply input Paul’s starting funds of zero, assumed a 10% rate of return, 35 years for the time he will be investing (he wants to retire at 65 and he is 30 now, so 65-30=35), and I entered his goal of $4.5 million, then I pushed calculate. The answer “You should deposit $1,185.26 monthly to reach your savings goal.”

Hopefully, socking aside nearly $1,200 a month is realistic for Paul, if not, it’s time for him to be more realistic about his retirement goals. Maybe he would be able to live off of less income than he has now, so he can adjust his goals down to 75% of what he makes now. It’s critical to set realistic and challenging goals.

I hope this helps Paul!

How Consumer Debt Can Lead To Tax Liabilities & Problems

Whenever an individual chooses a debt program which allows them to pay less than the total amount owed, there are always potential tax consequences. The IRS in most cases consider consumer debt that is cancelled or forgiven as income. Getting out of debt is a necessary goal to become financially stable – but in many cases with debt settlement, you could find yourself with new tax liabilities or tax debt that results in larger financial difficulties than you experienced before.

If you’re paying back debts in full, there are no tax consequences to worry about. Many debt management plans, Chapter 13 Bankruptcy, and debt consolidation all require that the total amount owed is eventually repaid, and therefore your debt will not adversely affect your taxes. For all other debt repayment options that involve paying only a portion of the balance owed, the situation becomes complex and can often result in a negative affect on your taxes.

Settling Debt for a Lower Amount Than You Owe

If you or a debt management company negotiate a lower payment than the total amount owed to officially close out the account and fulfill your responsibilities, than the amount the creditor forgives is considered income at tax time. If you owe $12,000 but the creditor agrees to accept $3,000 instead, you’ve just added an additional $8,000 to your taxable income.

Whenever a company forgives debt for a consumer (like Credit Card Debt), they must submit a form to the IRS (1099-C) and to the consumer. The consumer uses the form to report the income on their tax return during the year the debt was forgiven. Most of the time, the forgiven debt is reported on a 1099-C to both the IRS and the consumer, and then the consumer includes the amount forgiven on line 21 of form 1040; or 1040-A when filing their tax return.

In some cases, there are exceptions. For example, the Mortgage Forgiveness Debt Relief Act of 2007 states that you can have up to $2 million in mortgage debt forgiven as long as the house associated with you discharging debt was your primary residence. This includes debt through mortgage restructuring or in connection with a foreclosure. This act covers consumers through 2012. Realize, this act though does not apply to credit card debt, car loans, or mortgages associated with second homes.

Chapter 7 Bankruptcy

In a Chapter 13 Bankruptcy, the consumers debts are simply reorganized into more affordable payments. The consumer is still responsible for paying their debts so usually no. In a Chapter 7 Bankruptcy, part or all of a consumer’s debt is forgiven, which means there is taxable income associated with the bankruptcy according to the IRS.

In many cases, an individual filing Chapter 7 is insolvent, meaning their liabilities exceed the fair market value of their assets. If this is true, then income from canceled debt is not counted as income on the tax return (up to the amount of their insolvency). If the consumer does not have liabilities that exceed their assets, then the income realized from filing bankruptcy is used to reduce certain tax attributes. For example, if you had $30,000 in credit card debt, and $20,000 in assets, you are insolvent by $10,000. If your credit card company settles with you for $15,000, you essentially would report $5000 in taxable income on your tax return.

You can fill out the Insolvency Worksheet (use the one in IRS Publication 4681) provided by the IRS to determine whether or not you are considered insolvent, and by how much. The amount of insolvency is then reported on IRS form 982, as well as the amount of debt involved in the bankruptcy.

Other Exceptions

Realize there are other exemptions where forgiven debt is not considered taxable. This includes certain student loans that are forgiven when you agree to work for the government or government related organization for a certain period of time, debt cancelled with a Chapter 11 bankruptcy (in most cases), and debt that was forgiven because the debt was accumulated form your identity being stolen. When in doubt, speak with a tax professional if you have questions in reporting forgiven or cancelled debt.

This is a guest post was provided by TaxDebtHelp.com, a website that provides informational articles and tax relief services to taxpayers needing IRS debt help.

Personal finance basics – budgeting and planning

We’re now on to the fourth lesson in my personal finance basics series. It’s important to know that my lessons are not necessarily in chronological order, as this lesson could have easily been one of the first steps, rather than the fourth. However, for simplicity I wanted to present key concepts (setting goals and analyzing them) in understanding the overall picture before we take a step back and break down the basics in more detail. Having said that, we are now starting at square one, the very fundamentals of personal finance, looking at your income and expenses to better understand your current financial situation.

Every week, two weeks, or month you’re paid for the work you do. This is your income for now, later you will build income from your savings and investments. It’s important to understand that this money that you’re making is limited for the time being, and you must get a handle on how much you’re bring in, versus how much you’re spending, if you ever expect to be able to save and invest. If you’re spending more than you’re bringing in you will have a very difficult time achieving any kind of financial success.

The purpose of budgeting and planning is to take control of your spending.

If you set no guidelines on how you spend, it’s hard to determine if you’re on track to meet any goals you’ve set. By laying out your income and expenses, you can see where your money is going and you can determine if you’re on the right track or not. At the beginning of the month you plan how much you will bring in in income and spend in expenses, and at the end of the month you must evaluate how well you did against what you said you were going to do.

There are several free programs on the web designed to help you set a budget and track your finances. There are also various software programs that you can pay for, that may offer more than the free versions. But for now, I would encourage you to try out a free program to limit your spending.

Most all businesses operate based upon budgets or forecasts, at least the successful ones do. You must treat your personal finances as a business does. Why? A business without forecasts or budgets would have little control over spending and it would be hard to hold anyone accountable for their spending. When a business sets their budgets or forecasts, they make assumptions based upon their current needs versus their future needs for cash. In other words, they only make so much money, if they don’t balance their current needs against their future needs, they will be challenged to grow their business because they won’t have the money to expand. Just like you, if you only concern yourself with what you need now, you probably won’t have anything for later.

With a budget or forecast in place, the business owner can evaluate how well they did, and if there is overspending in certain areas, they can take corrective measures to ensure it doesn’t happen again. Without this, it would be much harder for them to determine what even went wrong. At the same time, if they see areas where they underspent, they can reevaluate their needs and see if they can decrease their budgeted spending in certain areas. The idea is to make realistic yet challenging budgets. The same is true for you.

In your budgeted expenses you must build in to account your need for saving for the future, so you can grow your money to one day work for you. Otherwise, you will be trapped into working for money for the rest of your life.

This all sounds much more difficult than it really is, the bottom line is you want to hold yourself accountable for your spending, to make certain that when you spend it truly is a complete necessity. You may be scared to do this, but you shouldn’t be, this is the first step to making a great change in your life. Don’t be worried that you will no longer be able to have fun, I will show you soon how to learn how to be much happier without spending a dime in most cases.

My next lesson will take a deeper look at setting up a budget for yourself, so we can make better sense by actually seeing what I’m talking about above.